Remove low level services inside the guest

Then you need to get rid of anything in /etc/init/ that tries to fiddle with your Server's Hardware or other low-level Stuff that's already handled by your host's kernel/system. Having one such scriptlet still enabled might cause the whole upstart system to fail (like not beeing able to open /dev/console or failing to start the udev system).
Just remove these scriptlets, move them out of the way or rename them to something not ending in .conf. Be aware that upstart also parses subfolders of /etc/init/ for .conf files.

The utmp stuff is needed if you mount /var/run as tmpfs and you don't create utmp anywhere else.

Remove console outputs

If your VServer hangs on the command

vserver <name> stop

and puts out

A timeout occured while waiting for the vserver to finish and it will
be killed by sending a SIGKILL signal. The following process list
might be useful for finding out the reason of this behavior:
----------------------------------------------------------------------
<pid> <context> <name> ? Ss 0:00 /sbin/init
<pid> <context> <name> ? Ss 0:00 /sbin/init
----------------------------------------------------------------------

If you do things at a console of the machine it will now print out detailed information. More on how to debug a Upstart job you'll find on http://upstart.ubuntu.com/wiki/Debugging.
Notice that if one fails they all fail.

then you're probably running the current stable version 2.6.22.19-vs2.2.0.7.

Upstart's /sbin/init implementation requires to be PID 1. It is linked against NPTL (in contrast to sysvinit), which has a bug in it's caching getpid(2) wrapper. With this kernel version getpid(2) returns the cached PID to init, resulting in init replacing itself with telinit. You can fix this by upgrading to a 2.6.26+ kernel and a newer vserver patch, or by patching upstart:

For more information see the man pages of getpid(2) (NOTES) and clone(2) (BUGS).

Init procedure doesn't complete

SSH

If you've completed all above steps and some init scripts doesn't get invoked at all (most notably old SYSV init scripts) you might have encountered same error that I did.
In Lucid guest I had to comment out following line in /etc/init/ssh.conf:

# replaces SSHD_OOM_ADJUST in /etc/default/ssh
oom never

to

# replaces SSHD_OOM_ADJUST in /etc/default/ssh
#oom never

After commenting out this line initialization completed successfully.

D-BUS

When creating guest as chroot some packages you might expect are missing. One of these is D-BUS. Strangely enough the /etc/init/dbus.conf gets installed which prevents Upstart to finish its starting sequence.